Cuba’s Wild West Real Estate Show
A recent report released by the Havana Consulting Group suggests elements of stagnation have disrupted Cuba’s effort to privatize the country’s residential real estate market. There are a number of important shortfalls that appear to be hurting prices. The shortcomings have led some natives to think they were better off under the old, government-controlled housing program.
Cuba’s most disruptive factor is the deterioration of existing properties. Havana Consulting Group (HCG) estimates that 60 percent of the country’s housing is in serious disrepair. Without the availability of sufficient building materials, the problem will only get worse. In truth, Cubans are quite ingenuous at do-it-yourself repairs but you can’t fix a leaky roof or get water pressure without proper materials.
Add to the expanding state of deterioration, the absence of a credible mortgage industry and it is easy to see how challenging it will be for homeowners to sell at competitive process. With the country’s average wage at about $20 per month, how does a typical family buy and maintain a residence?
Another serious detriment to housing is the shortage of new homes to house the native population. HCG estimates there exists a 1,000,000 unit shortage of suitable housing. Two years ago, the housing shortage was estimated to be 700,000 units. Other analysts suggest the gap is even wider. It is believed that deteriorating homes are creating more demand than supply exists but demand that lacks financial backing stunts selling prices. Many Cubans are holding onto properties that are in livable condition.
Then, there is the question as to why Cubans are buying homes at all, especially Cubans who reside in homes that are livable. Some say they are selling so their children can start their own lives outside the extended family residence. Others want to buy a car. But, there are strong suspicions that many Cubans are attempting to sell so they can leave the island. Cuba is a great place to visit but you might not want to live and work there and with a 95 percent literacy rate, you just might be qualified to get a job in another country, like the USA and a home without a leaky roof and with running water.
Now that government is not buying, there is a huge slowdown in new home construction. Between 1989 and 2001, the construction of new homes declined by 48 percent. Only 32,450 new homes were constructed in 2011. This is for a population of 11 million and adding.
HCG indicates that one factor that is helping the market is the influx of foreign investment. Unlike Cubans, foreigners are subject to property tax amounting to 2 percent of the selling price. Additionally, government is taking 4 percent from the seller and 4 percent from the buyer as a transaction fee in every transaction, native or foreign.
This is what motivates government and Raul Castro to change their policy. 8 percent off the top is a hefty fee. Cubans and foreigners are finding some pretty ingenuous ways to dodge the assessment but it is crime punishable by prison sentence to not pay the rightful tax.
HCG research indicates the following reductions in selling prices from 2012 to 2013.
- · Havana – down 19.80 percent.
- · Matanzas – down 27.47 percent
- · Holguin – down 8.36 percent
- · Cienfuegos – down 16.04 percent
It is clear that optimism was high when private homes first came available. Today, the market is experiencing a sobering effect. Government must get serious about its housing needs if it is to have a multi-dimensional, competitive marketplace and to rake in more of those 8 percent fees.
There is no province where prices are up although Sancti Spiritus prices only declined by 2.33 percent in 2013.
One thing has become clear. Havana is driving the country’s attempt at privatization. Presently, 19 percent of the total population resides in the capital city where 18 percent of the hotel industry is also located. Havana is the most cosmopolitan city in Cuba and there are areas in the city where foreigners already own condos. In mid-2014, there were 629 units for sale in Havana. This compares to 81 units on the market in Santiago de Cuba, the country’s second largest city. 119 units were for sale in Camaguey.
In 2013, the average selling price in Havana was 31,157 CUC. The average selling price in Cienfuegos was 31,863.64, the highest average selling price in the country. Havana Consulting also points out that homes built prior to the revolution are holding up better than homes built since 1959. They are better constructed and many are still in decent shape. Homes built since the revolution did not score as well in terms of condition.
Havana Consulting Group noted that at the time of the article, there were 829 homes listed on various Internet sites. This is especially interesting because the majority of Cubans do not have access to the Internet. In fairness, the majority of Cubans do not have capital to pay cash for a residence.
The bottom line is that Cuba’s real estate market has challenges. Government continues to struggle with the privatization model. There is not enough housing for Cubans, much less foreigners, and without a mortgage industry, where government could make some money, prices are bound to suffer.
Legalizing agents, allowing commissions, standardizing purchase and sale contracts, encouraging new housing starts and launching a true multiple listing service that would generate competition and track selling prices would be positive steps toward building a true marketplace.